High Court Case Raises Issue of Stripping Charities of Tax Exemptions

By LINDA GREENHOUSE

Published: October 10, 1996

WASHINGTON, Oct. 9—
A case that began as a minor tax dispute between a Christian Science summer camp and a small town in Maine had the eyes of much of the nonprofit sector focused on the Supreme Court today.

The Justices heard arguments on whether state and local governments can strip a charity of its exemption from property tax if most of the people it serves are not state residents.

The camp, Newfound/Owatonna, is appealing its $22,000-a-year property tax bill from the town of Harrison and challenging the law as an unconstitutional discrimination against interstate commerce. Ninety-five percent of its campers are from outside Maine. The camp would pay no property taxes if most of its campers were from Maine, a development that is unlikely ''without a massive conversion to Christian Science in the state,'' the camp's lawyer, William H. Dempsey, told the Court.

Supreme Court precedent, which has interpreted the Constitution's commerce clause as barring state economic protectionism in a variety of contexts, would seem to support the camp's challenge. In its most recent such ruling, earlier this year, the Court unanimously struck down a North Carolina tax law that gave proportional discounts on a stock tax based on the proportion of the issuing company's income that was earned in North Carolina.

But Maine's Supreme Judicial Court took a different approach, upholding the 39-year-old property tax law last year in a ruling that alarmed religious groups and other nonprofit organizations around the country.

In friend-of-the-court briefs, organizations including the United Way, the Y.M.C.A., the American Council on Education and a variety of religious groups warned the Court that if other states took the same approach, many organizations that served an out-of-state population -- colleges, for example -- could find themselves suddenly liable for taxes on valuable real estate.

Although he later modulated his tone, Justice Antonin Scalia got the argument off to a rather aggressive start, asking the camp's lawyer: ''Why should the taxpayers of Maine subsidize people from outside Maine? I don't know why they should be required to do that.''

Mr. Dempsey replied that while the state had a legitimate interest in making sure that local residents got the benefit of tax policies, the question for the Court was whether the state's approach was permitted by the commerce clause. The Court could only uphold the law, he said, by reinterpreting the commerce clause to make it somehow not apply to nonprofit organizations.

''It shouldn't make a difference whether you're dealing with profits or nonprofits,'' Mr. Dempsey said, adding, ''Nonprofits in this country are big business in every sense of the word, except they don't make a profit.''

By the end of the argument, the Justices appeared to agree that the question did, indeed, come down to whether the Court should take the drastic step of carving out a new commerce clause doctrine for charities. Whatever their concerns about the camp's position, the Justices seemed unlikely to go that far, in part because the town's defense of the law raised even more concerns.

The state itself did not appeal a state trial judge's original ruling, in 1994, that the law was unconstitutional, and it did not appear in defense of the law in the Supreme Court. That left the job to the town of Harrison, which is about 40 miles northwest of Portland and has a population of 2,200.

The town's lawyer, William L. Plouffe, managed to startle, rather than persuade, the Justices with his casual dismissal of the analysis behind the Court's leading commerce clause precedents.

At one point, Mr. Plouffe suggested that the commerce clause should not apply to real estate taxes, because real estate stayed in one place and did not move across state lines. Justice David H. Souter objected that the question was not whether the camp moved, but whether people traveled to Maine to attend the camp.

''Interstate commerce is the movement of people back and forth across state lines,'' Justice Souter said to Mr. Plouffe as if addressing a beginning law student. ''Are you challenging that?''

''I certainly am,'' Mr. Plouffe replied. For a moment, no Justice had anything to say.

Throughout his argument, Mr. Plouffe stressed that the law's rationale was to make sure that the taxpayers got some benefit from organizations that enjoyed a tax exemption. Justice Ruth Bader Ginsburg offered the hypothetical example of two nonprofit camps in Maine, each serving blind children. The smaller camp had 50 campers, all from Maine. The larger camp also had 50 campers from Maine, as well as 60 campers from outside the state.

Observing that both camps would be ''rendering exactly the same benefits to the state of Maine,'' Justice Ginsburg asked whether the larger camp would lose its tax exemption. Yes, Mr. Plouffe replied. But he also indicated that an otherwise ineligible camp might earn a tax exemption in return for offering a public benefit like access to its beach.

Justice Scalia eventually became exasperated. ''How long has this law been in effect?'' he asked. ''It seems to me more trouble than it's worth. Maybe we should strike it down for foolishness.''

Nonprofit organizations have property tax concerns beyond this case, Camps Newfound.Owatonna v. Town of Harrison, No. 94-1988. They are watching a voter referendum on the ballot in Colorado next month, which would extend property taxes to most charitable, religious, and nonprofit social service organizations in the state. Sponsored by a talk show host, John Murphy, who argues that ''God is not broke'' but that Colorado cities are, the proposed state constitutional amendment gained a place on the ballot after receiving 88,104 signatures.

Photo: A tax dispute at Newfound/Owatonna Camp in Harrison, Me., has raised the question of whether nonprofit institutions that mainly serve people from other states can be denied exemptions from state and local property taxes. The Supreme Court heard arguments in the case yesterday. (Associated Press)